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Thursday, January 22, 2015

America and other free market countries are still reeling from the devastating real estate market value collapse from the great recession of 2007-2009. The bursting of this undetected real estate speculative bubble cost many trillions in lost wealth to both private citizens and countries treasure and prestige. Capitalism, once again received another black eye and is perceived as an outdated economic model that promotes greed at the expense of the poor and the middle class. The rebound from this tragedy has increased the net worth of America’s wealthiest citizens by 25% due to aftermath buying opportunities, and reduced the poor and middle class net worth by 25% that didn't have the resources to take advantage of buying opportunities. The losses in tax revenue has caused governments to borrow (or print) more money to keep government service operational. The only way governments can ever attempt to reduce this national debt is to either inflate their way out of debt by paying debt with cheaper money and at the same time try to stimulate their economies by inadvertently planting the seeds for another speculative bubble to form.

How did this speculative bubble
happen in the mid 2000’s? Better yet, how do we keep this from occurring again?
The United States and other developed countries have four levels of risk
analysis to evaluate sales prices that buyers and sellers put together and want
to finance.

The Real Estate
Market “Food Chain”

The market (buyers & sellers)
puts deals together with the help of the business space that includes Realtors,
architects, etc. Once these deals are submitted for financing the first line of
defense in evaluating the deals overall risk are the appraisers. Once approved
by the appraiser, banks lend on the deal. The next line of defense are the bank
examiners. Once the bank examiners give the bank a clean bill of health, the
banks will sell some or all of their loans into the secondary market (Fannie
Mae, CMBS, etc.). These markets bundle similar property loans together into a
bond like financial instrument. Consequently, the third line of defense are the
bond rating companies (Moody’s). The bond rating companies look at the risks of
borrower defaults and the strength of collateral (market value of properties).
If the borrower’s credit is acceptable and the market values of the collateral
are assumed to be sustainable, the bond rating companies rate these bundles
with very high ratings. Once rated, these bonds will be sold to bond investors
and find their way into retirement funds, pension funds, etc. To oversee all of
this activity is the federal government as the fourth and final line of defense
in evaluating risk. The government guarantees the loans in many of these secondary
markets and legislates regulations in an attempt to prevent financial disasters,
maintain a “level playing field” and all the while trying to keep the economy
moving forward.

The major flaw in this food chain
starts with market values of properties put together by buyers or sellers. For
example, let’s say a buyer or seller has negotiated and are in escrow for
$500,000 (this example could be a residential or commercial property). There
are 5 back-up offers on the property for $500,000+ and all recent comparable
sales are being sold for $500,000+ in the area. The buyer solicits a loan from
a bank and orders an appraisal. Appraisers will verify that the sale represents
a market value sale by checking off the elements of the definition of market
value.

Arms-length Sale

Willing seller and willing buyer

Each under no duress to buy or sell

The buyer and seller are equally knowledgeable of the
market

The property has been exposed on the market for a
reasonable length of time

Property is sold for cash or cash equivalent

If the appraiser verifies that the
transaction represents a market value sale, he proceeds with the development of
the appraisal by doing his due diligence, collecting data, applying appropriate
valuation methodologies and arriving at the property’s single-point-in-time
market value, typically as of the date the appraiser’s inspection. By law,
licensed appraisers are required to reflect a market value estimate that
represents the market’s conclusion based on supply and demand. The appraiser
cannot dictate to the market what he would pay for the property if he was
purchasing, but rather what a typical buyer would pay for the property. In our
example, appraisers will be obligated to appraise the property for $500,000
without risking ethical violations from the state license board for steering
the value above or below the property’s current market value. Even though the
appraiser might feel uncomfortable with this market value, due to irrational
exuberance in the marketplace, unless he can support a lower value, the
obligation is to confirm the $500,000 sale price as a market value. If the
appraiser feels this market value is unsustainable during a typical ownership
holding period, and reports this to his client, he risks violating licensing
law by reporting a misleading appraisal with an unsubstantiated value
sustainable forecast. Also, the appraiser is well aware the client will potentially
not use his services in the future due to the appraisers perceived competency
problem. Many appraisers who were communicating their unsupported biased values
and feelings of value sustainability to their clients were blacklisted during
the mid 2000’s. After the bubble burst, they felt somewhat vindicated but
nevertheless remained bitter at other appraisers that were simply reporting
market value without unsupported value sustainability comments. As a result ,
today’s appraisers in today’s market are “gun shy” in concluding, in our
previous example, that the property’s negotiated sale price of $500,000
represents market value. Appraisers fear a future lawsuit if they appraise the
property for $500,000 and the value collapses sometime in the future. Consequently,
appraisers are imputing unsupported feelings into the appraisal process in an
attempt to be “conservative”. What’s worse, the licensing board is turning a
blind eye to these ethical breaches even after an avalanche of complaints from
market participants. Turning a blind eye to this behavior is very dangerous by
allowing “conservative” appraisers to dictate the free markets. This policy can
be as bad or worse than turning a blind eye to appraisers that appraising
properties above market value. Both of these policies are a drag on economic
growth either now on in the future.

Getting back to our mid 2,000’s
$500,000 sale price, the bank would make the loan, once this sale price was
verified by the appraiser as the property’s market value. Bank examiners
looking at the banks loan verified the borrowers credit and the market value
collateral that backs up the loan and gives both a clean bill of health. The
bank would either keep the loan as a portfolio loan or sell the loan into the
secondary markets. The bond rating companies are then hired to yield rate the
bundles of loans as they compare to other financial instruments in the market
place. If the borrower’s credit was reasonable and the loan collateral market
value was verified by the appraiser, the bond rating companies give these bonds
high ratings. Consequently, these bond were sold into the bond markets.

Here’s the problem: until now,
all along the “food chain” there has never been a quantitative process and
methodology to detect the formation of speculative real estate bubbles. Warren
Buffett’s famous sage advice says, “Price is what you pay, value is what you
get.” Mr. Buffett instinctively knows every property has an intrinsic or
fundamental value as well as a market value. Any market value deviation from
this intrinsic value is due to irrational exuberance in the market place in the
form of irrational price speculation. Built into every market value is an
expectation or forecast of the economic benefits while owning the property as
well as an expectation of what the property will sell for at the end of the
ownership holding period (called reversion). Because value is the present value
of the future benefits, this mostly hidden reversion expectation of what the
property’s ending sale price value must be is what pushes the current market
value away than the property’s current fundamental value. Without knowing this
hidden risk, the market and its related food chain is vulnerable to reoccurring
booms and busts resulting in devastating financial consequences. Without
knowing these hidden risks, booms and bust are going to become more frequent
and more intense eventually destabilizing citizens and entire countries.

This is why I created Valuexpose TM,
an enterprise cloud based software that can easily be used by all participants
in the food chain, not only buyers and sellers that put deals together, but all
the business verticals down the food chain line all the way to government
legislators. This new patent pending technology goes many steps beyond the
Dodd/ Frank financial reform by allowing users to be proactive, not reactive in
flushing out hidden risks in the market place and identifying bubble formations
on a property-by-property micro basis, not on an unsupported national macro
basis.

Now market participants will know
if it’s a good time to buy or sell a specific property without being blinded by
the property’s super demand or lack of demand and current market value selling
prices of comparable properties. Appraisers or any food chain participants can
now report whatever the market indicates as a property’s current market value
without letting there unsupported personal prejudice leak into their market
value conclusion. They can simply impute into Valuexpose their concluded
single-point-in-time market value and let Valuexpose automatically digest this
value and print out a report that indicates the following:

What forecasts (or bets) is the market expecting in
the future to support the property’s current market value. These forecasts
also include what the market is expecting the property to sell for at the
end of the ownership period.

How much, if any, has the property’s current market
value detached from the property’s intrinsic or fundamental value.

Where does the property’s current market value lies
on the business cycle giving an indication if this is a good time to buy,
sell, start a development/ remodel or lend on this property.

If the property’s current market value is sustainable
over an ownership holding period and at what future market value reversion
the property will most likely gravitate towards.

If you currently own the property, what specific
level of debt you should not exceed without putting yourself in danger of
becoming an “underwater” mortgagor.

For appraisers, after they have
derived the market value estimate, the printable Valuexpose report can be added
to their normal appraisal report giving their client all the risks associated
with the property’s current market value. This added report will substantially
reduce the future liability of being sued or turned into the state licensing
board because injured parties are trying to “claw back” their losses by playing
“Monday morning quarterback.” This ruse is meant to imply that the appraiser
should have known the value of this property would not be sustainable. The
Valuexpose report gives all users of the appraisal, after the report is
delivered, an opportunity to impute his personal forecasts if he disagrees with
the market’s forecasts that make up the property’s appraised market value. The
clients’ forecasts can easily and instantly indicate an “investment value” that
lets them impute their own risk tolerance. This added service to the client
will be appreciated as well as protecting appraisers from future lawsuits, and
other liabilities. For instance, if the client does not call the appraiser with
his concerns about the market’s forecasts regarding the property’s current
market value, the inference is that he thinks there is a reasonable probability
these forecasts are achievable in the future. If for any reason these forecasts
substantially change in the future causing the property’s future market value
to substantially differ from the appraised current market value, the client
will have a difficult time proving the appraised market value was incorrect at
that point in time.

As you can see, once the food
chain receives more than the traditional single-point-in-time market value
estimate, greater reliance on these values can be counted on and appropriate
loans and risk rate can be formulated by risk analysis (bank examiner, bond
rating companies, and the federal government). Capitalism can be stabilized
with steady economic growth based on the country’s merit, not speculative
values that can disappear in an instant.

Valuexpose standardizes this
whole process and makes it easy for the entire food chain to be used with a “Wizard
Questionnaire” format, allowing the user to simply answer basic questions.
Valuexpose does all the “heavy lifting” of creating complex discounted cash
flows (DCF’s) and other valuation methodologies that in the past were only
performed by experts that were found further down the food chain.

Not only was Valuexpose designed
for ease of use and efficiency, but is inexpensive to use on a subscription basis
(cancel at anytime-no questions asked) and can be used on any fixed or mobile
device anywhere in the world. Also, Valuexpose can be used in any foreign
currency without currency exchange.

Don’t get left behind by ignoring
these advancements in valuation tools, value sustainability and economic
feasibility of proposed developments. For years, business verticals in the food
chain have been clamoring for this information. The appraisal Institute’s
guidenote 12 (link) and subsequent Beyond Guidenote 12 are initial
evidence of the problems we face and the answers demanded. This guidenote and
whitepaper are the direct results of surveys conducted by the Appraisal
Institute of frequent users of valuation reports and what they are demanding
from valuation experts.

Please join me and the Valuexpose
team in the most advanced productive solution in solving the results of
“irrational exuberance” and preventing devastating economic collapses. Help
stabilize developed countries and give the greatest chance of success to
developing countries that are experimenting with capitalistic economic models.
A stabilized capitalistic model based on a free market leveled playing field
can distribute the economic success of a nation to the greatest number of
people no matter what their economic status might be. Greater world wide
economic stability leads to greater cooperation. Greater efficiency in the
appropriate distribution of capital leads to a better management of natural
resources and conservation.

I look forward to your
constructive comments and I am certainly open to suggestions to further advance
this important new technology.

About Me

Mr. Dozier has more than 43 years of appraisal experience and is a 40 year life member of the Appraisal Institute. He is a designated MAI member (the Appraisal Institutes highest designation) and also is a licensed real estate broker for more than 40 years. He graduated in 1975 from the University of Kentucky with a bachelors degree in business administration.
Raymond is the president of Dozier Appraisal Company, founded in 1980, and he is also the founder and CEO of Valuexpose, Inc, an enterprise software company specializing in patent pending valuation tools that will help prevent devastating speculative real estate bubbles.
Mr. Dozier has extensive expertise in valuation of all types of complex real property interests and of closely-held businesses. Mr. Dozier has extensively testified as an expert witness in Superior, US District and Federal Bankruptcy Court concerning valuation issues. He also served as a guest instructor at The University of Kentucky teaching corporate finance and the time value of money methodologies.
Mr. Dozier resides in Southern California (Palm Springs area).